On December 1st, AdvisorShares launched its 5th actively-managed ETF, the Peritus High Yield ETF (NYSE:HYLD) which will be the first actively-managed ETF in the US to focus on the high yield bond market. The fund will be sub-advised by Peritus Asset Management, a Santa Barbara, CA, based advisor that has been managing close to $500 million in assets through separately managed accounts, focusing on non-investment grade corporate bonds and loans.
HYLD has been in the works for a while now as AdvisorShares first announced their partnership with Peritus back in Feb 2010. Subsequently, in May 2010, AdvisorShares amended its application for the Peritus High Yield ETF to exclude usage of derivatives – a move that many other issuers have emulated since in order to avoid delays and additional scrutiny from the SEC. So all in all, it has taken AdvisorShares about 10 months to bring this actively-managed ETF to market.
HYLD will interest investors that are looking for additional yield in the fixed-income space, especially at a time when most investment grade bonds are offering miniscule returns. HYLD will be investing in a focused portfolio of high-yield debt securities, including senior and subordinated corporate bonds as well as leveraged loans. Peritus will perform analysis on each issuer to determine credit worthiness while taking a deep-value, contrarian approach to credit and focusing on absolute returns. The portfolio managers seek to exploit the fact that most fixed-income managers rely too much on credit ratings. The managers believe that the focus should be on the fundamentals of the business thereby placing limited value on credit ratings and evaluating true cash flow.
As of Dec 1st, the fund still had about 22% of the portfolio in cash, but according to the fund’s factsheet, that allocation should be closer to 5% eventually. The largest security holding with a 4.07% allocation was a high yield bond maturing 2015, with a 8.875% coupon, issued by Chiquita Brands International (CQB), a US-listed company that is a producer and distributor of produce. Other securities with a roughly 4% allocation were bonds of Sanmina-SCI Corp, an electronics manufacturing services provider, and JB Pointdexter & Co., another diversified manufacturing company.
HYLD will compete directly with other major passive junk bond ETFs such as the iShares iBoxx $ HY Corporate Bond Fund (NYSE:HYG) and the SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK), both of which track the US junk bond market. HYG and JNK both have massive asset bases and charge investors relatively low expense ratios. HYG has more than $7 billion in assets and charges investors 0.50% while JNK has $5.9 billion in assets and charges 0.40%. In contrast, the Peritus High Yield ETF will be charging investors 1.35%, which is the net expense ratio after a fee waiver of 0.02% from AdvisorShares. From the manager’s point of view, they are charging for the active management that investors are getting access to. It’s easy to see the utility of active credit analysis in the junk bond space where issuer quality can mean everything. However, the managers behind HYLD will have to show going forward that their active management provides a value-add that justifies the much higher expense ratio that investors are being charged.
Another interesting fund that AdvisorShares has under works is the Active Bear ETF (NYSE:HDGE) whose investment mandate will be to earn returns being short equities. A short-only fund will be another first from AdvisorShares, which has built up a reputation for coming out with unique strategies that investors haven’t been able to access easily.
Written By Shishir Nigam from ActiveETFs | InFocus Disclosure: No positions in above-mentioned names.
Shishir Nigam is the founder of ActiveETFs | InFocus (http://www.etfshub.com/), which provides extensive coverage and analysis of actively-managed ETFs in US and Canada, including debates on major industry trends, insights on the latest product launches from issuers in the Active ETF space as well as in-depth interviews with industry executives and thought leaders.
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